Levine on Wall Street: Saying Quite a Bit on Pay

Mostly because shareholders didn't appreciate how it "increased its bonus pool for 2013 by 10% despite a sharp fall in 2013 pretax profit." England has had hundreds more years to practice holding meetings than America has, and so is better at it:

Cries of "yes" greeted the rhetorical question posed by remuneration committee Chairman John Sunderland on whether anyone really thought the bank wanted to pay people more than it had to.

Such heckles are commonplace at annual meetings in Britain, and Barclays's meeting is typically an unruly affair.

Obviously "more pay for less profit" is not a great look for a bank, but as the Epicurean Dealmaker puts it, "Reducing capital-intensive risk taking in i-banks will only increase the relative productivity and pay of labor." If you can't take risks with shareholder (taxpayer?) money, you don't need to pay the shareholders as much for their money. And if you have to make your living on fees and relationships, you gotta pay the guys with relationships.

The Royal Bank of Scotland, like every bank in Europe, can't pay bankers bonuses that are larger than their salaries -- unless it gets shareholder approval, in which case it can pay up to two times salary. And like every bank in Europe, RBS planned to get that shareholder approval. Unlike every bank in Europe, though I guess like kind of a lot of them, RBS is 81 percent owned by the UK government. Do you see the problem here? Weirdly, RBS did not. Now it does:

But the [government] financial agency indicated that it would vote against any resolution that included a two-to-one bonus ratio, R.B.S. said on Friday. Given the government’s large holding, the plan would most likely not pass, the bank said.

I have this weird thing where every time I listen to Des Walsh, the syrupy president of Herbalife, for more than five seconds, I think, "how can this man not be running a scam?" I guess that's just me though? Anyway this ABC News investigation into Herbalife starts strong but sort of fizzles into pox-on-both-your-housing because Bill Ackman's Herbalife whistleblower somehow forgot to tell ABC that Ackman had agreed to pay him millions of dollars for his whistleblowing. Dan McCrum at FT Alphaville has more.

A study of British sports betting found that (1) the hot hand effect exists (people who win two or more bets in a row are more likely to win subsequent bets), (2) the gambler's fallacy is not just false but the opposite of true (people who lose two or more bets in a row are more likely to lose subsequent bets), and (3) these are artifacts of the streaks, not of the streaky winning/losing bettors' overall skill. Business Insider explains:

Xu and Harvey then looked at what kinds of bets were being made by gamblers on both winning and losing streaks and found something amazing. Bettors were behaving as though the gambler's fallacy were true and that either a winning or losing streak meant that their luck was more likely to change on the next bet. This behavior actually could lead to the hot-hand effect we saw above.

To see this, Xu and Harvey looked at the odds of winning for the next bet placed by gamblers on winning streaks and losing streaks. Gamblers on winning streaks became more conservative and started betting on races and games with better odds of winning, acting as though they believed that their luck was going to run out. Gamblers on losing streaks became more risk seeking, and started betting more on long shots, apparently believing in the classic gambler's fallacy that their luck would have to turn around sometime soon.

You cannot be entirely surprised by this, especially if you have ever played poker with me, but there's your important behavioral finance result for the day.

You knew that already, but now Cleary Gottlieb says so too. An important thing to notice is that everyone who thinks that Ackman's Allergan buying was insider trading is not a lawyer. The lawyers are all cool with it. On the other hand, Marty Lipton still dislikes activism.

Tracy Alloway at FT Alphaville writes about the prospects of idiosyncratic defaults: "The issue, according to Citi, is that investor demand for all things higher-yielding has helped push correlation in corporate credit to very high levels at the same time that systemic default risk has (ostensibly) remained stubbornly low."

This racially charged lawsuit is sad and strange, but also a good tale of corporate governance and the allocation of power at banks between executives and shareholders. Basically some experienced banking executives started a new bank to roll up small banks, pitched investors, got money, ran the bank for a while, and then were fired after some intemperate letters from one investor about some disputed expenses. Now they're suing the investor for defamation and stuff, claiming that the letters misrepresented those expenses for racist reasons (the executives are all African-American). I have no idea who's right here, but if you have strong feelings one way or the other about, like, the appropriateness of the Barclays bonuses, this is an interesting thing to read.

To contact the writer of this article: Matt Levine at mlevine51@bloomberg.net.

To contact the editor responsible for this article: Tobin Harshaw at tharshaw@bloomberg.net.

Matt Levine is a Bloomberg View columnist writing about Wall Street and the financial world. He is a former investment banker, mergers and acquisitions lawyer, and high school Latin teacher.
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